my mortgage broker says i should enjoy having a low monthly repayment on a 40year term, 2year interest fix and not worry about overpaying my mortgage. is he right?

[YourGreenDreamer]

I'm (27) in the process of buying my first house.

Broker put me on a 40yr 4.89% fixed rate. Monthly repayments will be £890p/m

Made myself feel better about the 40yr term by vowing to overpay my mortgage by at least 200p/m. Not ideal, but doable. especially as a serial saver.

Broker has told me to stop worrying and enjoy having a low monthly repayment as I'll probably be out of the property in a few years, won't be on the 40yr term forever, i'd have made some profit from selling and will be on another mortgage deal in 2 years. it's not my forever home and i do plan to sell in a few years but if i don't overpay, would i not risk my second mortgage still being a long term. i don't want to be paying interest until i'm old and grey.

How right is my broker? Should I "enjoy" paying just 890p/m or should I focus on overpaying my mortgage for at least the next two years?

he seems a bit too jovial and it's concerning.

I agree that you will most likely move in a couple of years so the term isn't that relevant. Did you get quotes for a 35 or 30 year term also? Why not choose one of those if you have the extra income and want to pay off more?

i was under the impression over paying significantly reduced the amount you were paying due to the interest loading?
I think Martin Lewis did something on it.

If you can find a savings account with a higher rate then put the amount you were going to overpay in there and then you can pay a lump sum when you remortgage

That seems nuts, but I guess he gets a good commission on that product.
You do realise that in two years when you need to change to another product you will have paid almost nothing off the balance ? It will be nearly all interest..

This is often terrible advice. It’s a higher rate on a smaller amount of money.

You can't always overpay on a fixed rate but you could put that £200 into a savings account and then make a lump sum repayment at the end of the fix.

hi popquizzer,

we initially went for a 30yr deal, but it fell through as they wanted to lend me less and i wouldn't be able to make up the shortfall

i think there may be a lack of understanding on my end then. does this mean there is no point in overpaying a mortgage unless you plan to live in it until it's paid off?

Please do ask him to show you what the redemption figure will be after the 2 year fix. You will be horrified when you see you have paid over 21k and still owe nearly the same amount as you borrowed.

that's what i understand as well and i'm happy to overpay, just a bit thrown off my broker would tell me to enjoy the low repayments rather than overpay. am i missing something?

no, i realise that and it is odd that he would advise that. that's exactly what i'm trying to avoid... paying off just the interest.

does the advice only make sense if i plan to sell at the end of the 2 years? i'm trying to wrap my head round the bizarre advice

If you can afford to overpay why can't you get a different mortgage? Try another broker?
What sort of arrangement fee are you paying for the fix and how much for the next one?
I think I'm missing the point here. But why not just enjoy spending the money now?

wow. sounds like a nightmare i want no parts of.
do you think his advice only makes sense if i plan to sell in 2 years? why would advise something so outlandish.....

It does seem odd advice but I guess brokers profit from having people permanently paying into mortgages. If you're planning to move in a few years time, the more of the capital you have paid off through overpayments the more you will have to put towards your next property. Unless you can get a much better after-tax-interest rate or there are heavy redemption penalties, overpaying makes a lot of sense.

No, your thinking is right and normal.

Whether you overpay each month (if you are allowed to ? There are restrictions about this on many deals) or whether you put it into a savings account and then pay off as a lump sum when you remortgage in 2 years, it is never a bad thing to start paying down what you owe.

Put your figures through a mortgage calculator online and you'll be amazed how much you save in interest over the years by overpaying now.

The more you over pay the more of the actual price of the house you will have paid for. When you do move you will own a bigger percentage of the property and can put that towards your next purchase. Run your figures through the Martin Lewis mortgage calculator to get a feeling for the amounts. Also check in your terms and conditions. Often you can only pay 10% of your contributions for the year extra.

His advice doesn’t make sense, and I’d worry about the rest of his advice.

It’s always better to overpay if you can do so without penalty, I wouldn’t be confident about massive increases in house value over the next two years, and unless you are moving in two years I’d have looked at a five year fix myself, as the rates are lower (not always the case, but currently they are).

I second this - look up a repayment calculator and run some scenarios. You'll the the impact of overpaying quite clearly

Can you explain why please? The amount in savings would be the same as the extra that would be paid into the mortgage, so wouldn't it be better to put the money wherever the highest interest rate is?

I think that some financial advisors bring their own preferences to these things. And they can also get it wrong.

he should have explained the pros and cons and his reasoning.

he may have assumed that as a young person you just want to spend your money on avocado toast 🙄

I’ve been surprised by the number of advisors who recommend doing stuff that costs more in interest.

Why Don’t you call him up and ask him why he’d advised against overpaying.

also look at Martin Lewis’ website

I wouldn't go into any property where you could see yourself living for at least 5 years. Moving is expensive and stressful and you are going to lose your first time buyer allowance. Also most mortgage providers only allow to overpay 10%. And bank accounts don't pay anywhere near 4.89%. I think you need to rethink your purchase. I agree in principle buying property when young is a good idea but not at any price/terms

my broker found 2 other deals that were 35yr and but higher interest rate. he advised to take the 40 year term and at the time reassured me that i can overpay. today he says don't worry about overpaying and just enjoy the low repayments.

if by arrangement fee you mean the broker fee, i paid 295.

spent last year travelling the world. enjoyed the money, now it's time to get serious. if i can overpay to ensure i'm not in crippling dept when i'm old and grey then that's what i'll have to do

https://www.natwest.com/mortgages/news-and-articles/the-benefits-of-overpaying-on-your-mortgage.html

Your mortgage broker sounds like a charlatan!
Overpaying is always going to be the best option, to reduce the term and the total interest paid. See one link above for example. Or Martin Lewis's calculator below.

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

No I wouldn't have such a long term, or if really needed, make sure you can overpay which will reduce the term and thus the overall interest.

It sounds an awful deal

It seems like odd advice. We always paid off until we got into our current 10yr term. That's because we locked in when rates were low and benefitted so a couple of years we haven't bothered but have done now as we are looking towards paying off. We benefitted whenever we moved both from the equity we built up and property price increases and if we moved during a fixed term just ported our product so it always felt like a benefit. I'm no financial expert but it felt like we gained more by paying off as we went and getting more "cash" to use as a deposit or renovations when we moved. We looked at savings accounts recently but our calcs indicated we would benefit more from the overpayment than the saving due to wanting to pay off and redemption percentages etc so do spend some time on the maths!